Tuesday, December 30, 2008

Euro-Pound Parity?

Traditionally, the U.K. pound has always been the most valuable currency in the world, apart from briefly the currencies of a few small third world currencies. The odds are however now increasing that the pound might soon be valued less than the euro. It has fallen relentlessly in recent weeks and has traded today at near €1.02/£.

It didn't seem long ago when I noticed how the pound had fallen below €1.25 (which in inverted terms means the euro rose above £0.80), a time when I noticed that the pound had fallen from €1.38 when I first called for its decline. And it wasn't that long ago that the pound was valued as high as €1.5.

While the pound was clearly overvalued at €1.5 and €1.38 and even to a lesser extent €1.25, it is now starting to look undervalued from a fundamental point of view, even factoring in how the more inflationist attitude of the Bank of England relative to the ECB will debase that fundamental value. Which is why while I think it is possible and even likely that the euro will briefly reach a higher value than the pound, we are getting close to the peak of the euro's rally against the pound, at least provided that the Bank of England doesn't opt for some kind of radical inflationist "solution" for U.K. economic problems.

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